Q1 2009 CKE Restaurants Earnings Conference Call - Final.

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. John Beisler, Vice President of Investor Relations. Please proceed. JOHN BEISLER, VP, IR, CKE RESTAURANTS:

Thank you, Francis. Good morning, everyone, and thank you for joining us. My name is John Beisler, Vice President of Investor Relations for CKE Restaurant. CKE Restaurants is hosting this conference call to discuss our results for the 16 weeks ended May 19, 2008. Yesterday CKE issued a pair of press releases announcing its financial results for the 16 weeks ended May 19, 2008 and same-store sales for the four weeks ended June 16, 2008. These releases are available on our website, www.CKR.com. CKE he has also filed its Form 10-Q with the SEC. This call will reflect items discussed within these press releases and Form 10-Q. CKE management will make reference to them several times this morning. Speaking on today's call are Andy Puzder, President and Chief Executive Officer, and Ted Abajian, Executive Vice President and Chief Financial Officer. Andy will begin today's presentation with a few comments regarding our first-quarter results as well as our period five same-store sales results. Ted will then review our first-quarter results with you. Andy will conclude today's presentation with comments on the strategic direction of the Company. Andy and Ted will then take questions from callers. Before we begin I'd like to remind you of our disclosure regarding forward-looking statements contained in the Form 10-Q and the earnings release. Our disclosure regarding forward-looking statements can be found within our Form 10-Q under Item 2, management's discussion and analysis of financial conditions and results of operation. Matters discussed during our conference call today may include forward-looking statements relating to future plans and developments, financial goals and operating performance and are based on management's current beliefs and assumptions. Such statements are subject to risks and uncertainties and actual results may differ materially from those projected in the forward-looking statements. I introduce now to Andy Puzder, President and CEO. ANDY PUZDER, CEO, PRESIDENT, CKE RESTAURANTS: Thank you, John, and good morning, everybody. First quarter of fiscal '09 was a very positive quarter for our company on numerous fronts. To begin with, the expense reduction efforts and price increases we implemented over the past year bore fruit as we substantially reduced our year-over-year unfavorable restaurant operating cost comparison. In the second quarter of fiscal 2008 our restaurant operating costs were 300 basis points unfavorable to the prior year quarter. In third quarter our operating costs were 190 basis points unfavorable; and in fourth quarter our operating costs were 160 basis points unfavorable. In the first quarter of fiscal 2009 our restaurant operating costs on a consolidated basis were just 30 basis points unfavorable to the prior year. This 30 basis points increase was essentially due to increased depreciation from our ongoing remodel program at both brands.

Both food and packaging costs and labor and employee benefit costs were essentially in line with the prior year quarter. We also continued our focus on actual reductions to G&A expense in the first quarter. In this respect we reduced G&A expenses by $1.5 million, a 3.3% reduction as compared to the prior year quarter. We also reduced G&A expense as a percentage of total revenue by 10 basis points. We achieved these reductions despite a reduction in total revenue due to our refranchising of 195 Hardee's restaurants by the end of first quarter and an $800,000 increase in share-based compensation expense. In addition to substantially improving our year-over-year operating cost trend and reducing our G&A expense, we also had positive blended same-store sales for the quarter. Blended same-store sales increased 1.8%, our 11th consecutive quarter of positive blended same-store sales. With respect to our individual brands, same-store sales at company operated Carl's Jr. restaurants increased 3.9% versus flat results in the prior year quarter. Same-store sales at company operated Hardee's restaurants decreased 0.6% versus a 1.8% increase in the prior year quarter. We also reported same-store sales for period five yesterday. For the four weeks ended June 16th, blended same-store sales increased 2.6%. Hardee's same-store sales increased 2.8% during period five. On a two-year cumulative basis Hardee's same-store sales have increased 5.4%. For the fiscal year-to-date Hardee's same-store sales are now positive thanks to the successful launch of the Prime Rib Thickburger, the latest of our decadent meat as a condiment offerings. This burger features a 100% Black Angus charbroiled beef patty, sliced prime rib, grilled onions, Swiss cheese and horseradish sauce on a Ciabatta roll. Hardee's introduced it on May 14, during the last week of period four. On the first day of period five, Hardee's began airing our latest ad campaign featuring a fake restaurant in which unknowing guests happily paid $14 or more for a variety of Hardee's Thickburgers. Carl's Jr. period five same-store sales increased 2.5%. On a two-year cumulative basis same-store sales at Carl's Jr. have increased 5.3%. Carl's Jr. promoted the Chili Cheeseburger and Chili Cheese Fries as well as the Jalapeno Chicken sandwich in period five and began selling the Prime Rib burger on June 18th, the second day of period six.

As of the end of period five the blended average unit volume for our company operated stores was $1,191,000, a $29,000 increase over the end of fiscal 2008. Carl's Jr.'s average unit volume was $1,517,000, a $24,000 increase over fiscal 2008 and an all-time high for the brand. Hardee's average unit volume was $963,000, a $9,000 increase over fiscal 2008 and the highest average unit volume for the brand as far back as we can check. As you would expect, with our same-store sales and AUBs increasing, restaurant operating costs stabilizing and G&A expenses declining, our profits improved. Earnings per share in particular were up thanks in great part to our share repurchase program which was the primary driver behind a reduction in our fully diluted share count of 13.9 million shares or 20.4% of the diluted shares outstanding versus the prior year quarter. First-quarter net income was $16.6 million, a $900,000 improvement over income from continuing operations in the prior year quarter despite a decrease in profits associated with our refranchising of 195 restaurants over the course of the last year. Diluted earnings per share for the quarter were $0.31, an $0.08 or 34.8% improvement over the prior year quarter. Among other things this year's results included a $2.4 million or a $0.03 per diluted share benefit related to our interest rate swap agreement and a $1.3 million or $0.02 per diluted share income tax benefit resulting from recent tax regulations. A $1.3 million, or $0.015 per diluted share increase in facility action charges, and an $800,000, or $0.01 per diluted share increase in stock compensation expense, partially offset these benefits. We also achieved a $900,000 increase in adjusted EBITDA for the quarter going from adjusted EBITDA of $53.7 million last year to $54.6 million this year. Again, we achieved this increase despite the refranchising of 195 restaurants over the year. Ted will go into more detail on these matters in a moment. Our brands also continued to grow in unit count during first quarter. On a net basis we and our franchisees added 18 restaurants, taking our consolidated count to 3,101 units from 3,083 units at the end of fiscal 2008. The Company opened four new units; our domestic franchisees opened 16 new units and our international licensees opened 12 new units for a total of 32 new units during the quarter. We also remodeled 26 company operated Carl's Jr. and Hardee's restaurants during the first quarter. At the end of first quarter we had remodeled 262 restaurants or about 29% of our company operated system. While accomplishing all of the foregoing we also reduced our bank debt by $20 million, going from a year-end total of $351.1 million to total bank debt at the end of first quarter of $331.1 million. In summary, while we and our industry as a whole certainly faced challenges in the first quarter of 2009, which many of our competitors chose to address with margin impairing low prices and discounting, we continued to grow blended same-store sales and average unit volumes, improved our restaurant operating cost, reduced G&A expense, increased earnings per share as well as our adjusted EBITDA, and made necessary investments in our business while reducing our debt. I'll now turn the discussion over to Ted Abajian, our Chief Financial Officer, for his discussion of the financials. Ted?

TED ABAJIAN, EVP, CFO, CKE RESTAURANTS: Thank you, Andy. Good morning, everyone. Before I get started I want to let you know that during this conference call I will refer to a slide we posted yesterday in the Investor Relations area of our website which can be found at www.CKR.com. To view the slide go to CKR.com, click on Investors and then click on Presentations. At the point you will see a list of our presentations. I will be referring to the presentation dated June 25, 2008 which is entitled Q1 Adjusted EBITDA Slide. In addition, I need to make you aware that during this conference call we will refer to certain non-GAAP financial measures as explained in our earnings release issued yesterday and in our Form 10-Q for the 16 weeks ended May 19, 2008. During the first quarter we made progress with respect to net new unit growth, increasing same-store sales and average unit volumes, controlling costs at the restaurant level, and reducing our general and administrative costs. To help investors better appreciate the impact of our progress in each of these areas, I want to spend a few minutes discussing how these and other items affected our adjusted EBITDA performance for the first quarter. I will finish by discussing aspects of our interest and income tax expense. First of all, I want to make sure that everyone understands why we refer to adjusted EBITDA as opposed to EBITDA. Adjusted EBITDA, as reported in our Form 10-Q, is calculated using the definition that is provided in our credit facility. In our case EBITDA is adjusted for two items -- facility action charges, which is a line item on our income statement, and share-based compensation, which is a component of our G&A expense. Both of these items are added back to EBITDA to get to adjusted EBITDA. I now want to refer to the slide I referred to earlier which, again, is available on our website at CKR.com. This slide entitled Adjusted EBITDA Q1 FY '08 Bridge to Q1 FY '09 identifies and quantifies the primary factors impacting our adjusted EBITDA performance for the first quarter of FY '09 as compared to the first quarter of last year. First-quarter adjusted EBITDA increased by just over $900,000 versus the prior year quarter representing our first quarterly increase in adjusted EBITDA since the fourth quarter of fiscal 2007. The factors that led to the increase in adjusted EBITDA can be put into two categories as shown on the slide. The first category is changes in-store count and the second is changes in operating results. In the changes in-store count category you can see that the combination of store closures over the past year and the sale of La Salsa last July resulted in a $400,000 decrease in adjusted EBITDA in the first quarter. The refranchising of 136 Hardee's last year along with 59 Hardee's during the first quarter of this year resulted in a net decrease in adjusted EBITDA of $1.7 million for the quarter. The decrease in adjusted EBITDA resulting from refranchising was more than offset by a $2 million increase in adjusted EBITDA during the first quarter which resulted from our development of 23 new company operated restaurants last year along with four additional new restaurants this quarter. Moving now to changes in the operating results category, our 1.8% blended same-store sales increase provided a $1.9 million increase in adjusted EBITDA for the quarter. This increase was partially offset by a $1.6 million increase in same-store labor and other operating costs. The final item of significance was the $1.1 million reduction in general administrative costs that we achieved during the first quarter. To summarize, our $900,000 increase in first-quarter adjusted EBITDA resulted from the benefits associated with new unit development, increased same-store sales and a decrease in general and administrative costs partially offset by the impact of refranchising and restaurant operating cost increases. Getting back to the income statement -- we are encouraged by our progress during the quarter in narrowing the gap in operating income performance versus the prior year quarter. First-quarter operating income of $29.6 million was down about $400,000 versus the prior year quarter which is an improvement from the fourth quarter when operating income was down by about $1 million from the fourth quarter of fiscal 2007. Interest expense was $4.6 million for the first quarter, down $700,000 from the prior year. The year-over-year decrease in interest expense is the net result of a $2.4 million favorable adjustment to our interest rate swap agreements partially offset by a $1.7 million increase in interest on our credit facility due to higher outstanding borrowings as compared to the prior year. Next I will address our income tax expense for the quarter as well as our expectations for the remainder of the year. Income tax expense for the first quarter was reduced by $1.3 million as a result of recent tax regulations resulting in an effective tax rate for the first quarter of 36.2%. We expect our effective tax rate for the remainder of fiscal 2009 to be approximately 41%. As a result of our income tax credit carryforwards and the reversal of temporary timing differences, we expect that our fiscal 2009 cash income taxes will be approximately 22% of our pretax income. I will now turn the call over to Andy for his closing remarks.

ANDY PUZDER: Thanks, Ted. While we believe we made meaningful progress in the first quarter, we intend to push forward aggressively in our efforts to drive sales growth and implement cost containment initiatives in the face of well-publicized consumer weakness and inflationary pressures. We will continue to actively manage all aspects of our business and, where possible, reduce or eliminate costs without negatively impacting our operations at either the restaurant or the corporate level. At our annual shareholders meeting last week I discussed in some detail our G&A expense, capital plan and the reasons why we believe our new unit growth plans are in the best interest of our brands, our franchisees, our company and our shareholders. My comments and my presentation from that meeting are available at our website, www.CKR.com. Although some repetition is unavoidable, I think it's important to underscore the progress that we're making in several key areas. We have a number of exciting initiatives in progress which bode very favorably to the future of our company. Let's start with international development. Last week we issued a pair of press releases announcing significant international development agreements. First we've entered into a master license agreement with BreadTalk Group Limited and Aspac F&B International to open a minimum of 100 Carl's Jr. restaurants in China over the next seven years. We also announced development agreements with MDS Foods and Global Food Connection LLC to open a total of 25 Hardee's restaurants in Pakistan over the next five years. Including these deals we now have development agreements in place that will double our current international unit base to more than 600 units by fiscal 2014. Historically many of our international licensees have opened more restaurants than required by their development agreements and we're hopeful that our licensees will develop significantly more units than those for which we currently have commitments. We believe these recent announcements reflect the potential of our brands internationally. We're pursuing additional new markets such as Canada, Turkey and Australia, as well as a number of European and South American countries, and a potential joint venture in Mexico. Overall we remain very excited about our international platform which we expect will become an increasingly significant growth driver in the medium-term. Our capital plan -- we're currently in the third year of our five-year capital plan. In fiscal 2007 and fiscal 2008 we expended a total of $209.2 million; this includes $135 million of nondiscretionary spending which includes remodels, maintenance capital and investments in IT and our distribution center. The remaining $74.2 million has been discretionary spending which includes new unit growth and dual branding of our restaurants. As we previously stated, the nondiscretionary projects in our plan are necessary as we invest in areas where capital spending has been deferred for some time and we need to rebuild our infrastructure as required to maintain our existing business and to grow. We've also stated that we would adjust the discretionary portion of our spending as results and conditions warranted. We've encountered three issues with respect to our capital plan that warrant reducing our anticipated spending over the remaining three years of the plan. First, our refranchising efforts have reduced our capital spending as our franchisees will remodel the restaurants they purchase and maintain them going forward. Second, as the economy slows commercial, as well as residential, real estate development has also slowed. As a result there are fewer new high quality sites available than we anticipated when we announced our original plan. We will not build just to build and we are not satisfied building on anything other than a high-quality site. Deferring some of our new restaurant construction should also give us the opportunity to improve the return on our new Hardee's restaurants with the goal of bringing those returns much closer to the return on investment we're getting on our new Carl's Jr. restaurants. As such we've reduced our projected new unit growth for company operated restaurants through fiscal 2011 by 40 units, going from a projected total of 126 units to a new projected total of 86 units. Third, given weather conditions in the Midwest and Southeast this last winter and spring, plus the difficulties of obtaining permits in California, we're reducing the number of remodels we will complete during the next three years by 71 from 511 remodels to 440 remodels. Given the difficulties posed by inclement weather and permitting we believe this is a more realistic and achievable number. These adjustments will result in a reduction in projected capital spending for fiscal 2009. We're now projecting capital expenditures of $120 million to $130 million versus our prior guidance of $135 million to $155 million. As we've stated in the past, we intend to fund our capital plan from operating cash flows and proceeds from our refranchising initiative. In fact, we believe we will reduce our total debt year-over-year by the end of fiscal 2009. Over the next three years we currently expect to make capital expenditures of $354.2 million versus our prior total of $408.4 million, a $54.2 million reduction. Since we originally announced our capital plan in fiscal 2007 we've reduced our planned capital spending by a total of $86.6 million going from $650 million to $563.4 million. This year we now expect to build 24 Carl's Jr. restaurants and seven Hardee's restaurants. In addition to these 31 company operated restaurants we anticipate our Carl's Jr. domestic franchisees will open 37 units and our international licensees will open 27 units for a gross opening total of 88 Carl's Jr. units in fiscal 2009 up from 69 units in fiscal 2008. On the Hardee's side we project our domestic franchisees will open 13 units and our Hardee's international licensees will open 25 units. In all we expect to open a gross total of 45 Hardee's in fiscal 2009. For fiscal 2009 we expect to increase our restaurant portfolio by 80 units net, an increase from net unit growth of 74 units in fiscal 2008 and the largest net increase in unit count for our brands in any year this decade. With respect to refranchising, since our initial announcement last April we've refranchised a total of 201 Hardee's restaurants, this includes 136 units during 2008, 59 in the first quarter of 2009 and six subsequent to the end of first quarter. We've refranchised these units through a combination of existing Hardee's franchisees, new franchise partners and existing Carl's Jr. franchisees. In addition, the franchisees that acquired these units have agreed to build an additional 103 restaurants. Last week we also announced our intention to expand our refranchising program to include an additional 40 restaurants, bringing the total number of restaurants scheduled for refranchising to 241. We are currently in negotiation with potential franchisees for 33 of the 40 additional units. And actually I'm rethinking whether we should sell those other seven units. So it may be 33 instead of 40, but we haven't made a final decision on that yet. We will endeavor to complete the sale of these units, at least 33, within the next year. We will now take your questions.

OPERATOR: (OPERATOR INSTRUCTIONS). Brian Moore, Wedbush Morgan.

BRIAN MOORE, ANALYST, WEDBUSH MORGAN: Good morning. Congratulations on a very good quarter. A question on the P5 same-store sales release; certainly a very impressive acceleration of comps at Hardee's. I'm hoping you could maybe talk to whether you've seen a similar trend one week into the launch at Carl's with the prime rib burger, as well as maybe talk about the impact of weather, if any, during period five?

TED ABAJIAN: Obviously weather in the Hardee's markets improved in period five. Sonic came out with a press release I think earlier in the week or the end of last week talking about weather conditions and how they impacted Sonic's restaurants, which really are in a lot of our Hardee's markets. So you just have to watch the national news. We do have franchisees in Iowa; we don't own any restaurants there, but we have one franchisee who had a very high average unit volume unit that's simply gone, I mean the river took it away. And so there are still weather conditions, but obviously things have mitigated certainly across the Southeast and in our two principal markets, St. Louis and Indianapolis. Indianapolis is luckily not on a river. And St. Louis is, as you know, on the Mississippi. But we haven't really seen the kind of flooding that we've seen north of St. Louis yet. So weather improved substantially in period five and I think that is, along with the introduction of the prime rib Thickburger, and also a strawberry biscuit -- we introduced a strawberry biscuit at breakfast at Hardee's and that's been performing very well as well. So those have had a positive impact on our sales and I think that should continue on. I'd love to tell you how we're doing the first week with prime rib at Carl's, but obviously I can't. You have to wait another four weeks until we release our period six results.

BRIAN MOORE: I thought I'd try, Andy. (multiple speakers) the success of the prime rib product versus some of your past burgers like the Philly Cheesesteak (multiple speakers)?

ANDY PUZDER: Philly Cheesesteak was a very successful burger. I'm hoping this will meet or exceed those expectations. I think it's the best burger we've ever had. I don't know if you've tried it yet, but it's -- I actually stuck in what was on it today in the script, even though I really didn't need to just because I wanted to get it out there. It's an incredible burger, delicious.

BRIAN MOORE: Okay, I have had it. A question maybe for -- thanks on that -- for Ted and maybe John Dunion if he's around on really cost. Can you give us a an update on where you're contracted on commodities and perhaps your outlook there, maybe speak to -- I guess some of your peers have made comments regarding the difficulty of contracting for typical periods of time.

TED ABAJIAN: Yes, this is Ted. Good morning, Brian. John is actually not with us today, but I did sit down with him before we came to the call today. Really I think everybody is starting to see beef prices go up again with feed prices having gone up and that's something that everybody's going to have to deal with. We're going to certainly look at taking additional price increases as needed to offset incremental costs. But certainly I think all of the inflationary factors that continue to impact or that have been impacting food costs continue to impact food costs and that's something that, again, we'll have to deal with through pricing over time.

BRIAN MOORE: Okay. And any way to quantify -- you had very impressive sequential improvement the last two quarters on -- I guess in terms of the pressure you've had has been alleviated on the restaurant level margin line. As you look into Q2 could you give us some help there perhaps?

TED ABAJIAN: Again, Q2 we certainly do roll over the prior year that had significant cost pressure, so in that regard it perhaps becomes a bit of an easier comparison. But as I just said, we do have no cost pressures creeping up. Beef actually wasn't an issue during the first quarter. We are expecting to see beef prices go up in second quarter, in fact we've already seen that. And of course we're seeing federal minimum wage increases taking place which is really more of a Hardee's issue here in Q2. But as I said, we will take price increases. We've taken price increases, we will continue to take price increases to offset these costs. And so hopefully we can keep the price increases at a level that will offset these inflationary pressures.

ANDY PUZDER: Brian, I can tell you that there are some things -- there are different approaches to this problem. The approach we took last year, and that we'll take again this year, is that we will sequentially raise prices as these commodities go up. And depending upon how quickly they go up and how many of them go up at the same time, sometimes it takes us a little while to catch up, sometimes we can do it almost immediately. And we're really on top of the price increases that we're already experiencing in Q2 and we'll deal with those not only by price increases, but also other ways to adjust cost increase issues. And the one way -- the two ways we will not deal with the issues are by trying to drive business through discounting our products, serving inferior products or massively couponing. So we're going to -- you're going to basically see us continue to do what we've been doing and whether it takes a short period of time or a little longer period of time we will almost always catch up to those price increases. The question you're asking is a good one because it's one we address constantly which is are prices increasing so fast that we can't keep up as happened last year? It took us a couple of quarters to get caught up. Or are they increasing at a rate where we can keep up and we certainly do everything we can to make sure it's the latter situation as opposed to the former. On the other hand, we don't want to get in a situation, like some of our competitors did, that they raised prices massively last year, took huge price increases and now they've driven away some of their business and they have no room to take further pricing. So it's a real balancing game, but we think we're on top of it and we believe we have the situation in control.

BRIAN MOORE: Thanks for that color, Andy. Maybe a follow-on to that in terms of do you see a price ceiling at all for fast food hamburgers? I'm here in the California market, obviously you launched the prime rib burger here, it's approaching the $6 level obviously. So where do you see that kind of topping out?

ANDY PUZDER: I'm not sure. I think that as long as we can stay -- as long as we serve a burger that's as good or better, and I think better, particularly this prime rib burger, than the casual dining places serve, and as long as we approach it as a -- we market value different than other companies. You've probably seen the fake restaurant ads. But we're not saying come in and get a piece of gut fill for $0.99 when everybody knows you couldn't go to the grocery store and make something for $0.99 that was edible and you're not paying labor and rent. Instead of doing that we say, look, here, people are willing to pay $14 for this burger in a restaurant; you can get it at Carl's or Hardee's for $4, $5 or $6. The Prime Rib Thickburger that was one of the main drivers of our improvement in same-store sales at Hardee's for the last period is the most expensive Thickburger we've ever sold. But people do perceive that there's a value to that that they're going to get something that's worth more than what they pay for it, they pay less than what it's worth and I think as long as people perceive that as a value that we're going to be able to continue on this path.

BRIAN MOORE: Thank you. Just two more quick questions. On G&A, the $1.5 million improvement, could you give some color of that headcount reduction? Should we annualize that savings in out quarters?

TED ABAJIAN: Brian, I think there have been a number of areas we've made reductions, but I think in terms of trend I do look at the spending levels in Q1 as a good starting point for expectations for the remainder of year. However, I will point out -- and this is in our 10-Q as well -- that there will be -- within G&A is our share-based compensation expense and there's about a $1 million year-over-year increase in Q2 that you will see. There was I think $800,000 in Q1; so it's about the same level of increase in Q2 on share-based comp. But I think Q1 overall G&A run rate is an appropriate run rate to be modeling.

ANDY PUZDER: And also, Ted, you don't -- the share-based comp applies if you're looking at our profitability but not to your EBITDA analysis, is that right?

TED ABAJIAN: That is correct.

BRIAN MOORE: Okay, thank you. Just a final question maybe for you, Andy. On the beverage platforms, energy drinks, new products -- is that a calendar year '08 type event or something in '09? ANDY PUZDER: We're actually working with Coke right now on updating equipment, putting in new equipment, updating the quality of the drinks. We've been testing an energy drink. Energy drinks -- my favorite one is Full Throttle and that's a Coke product and we've tested putting that in some restaurants and I can't say that it's had a particularly meaningful impact on sales. I know one brand -- one of our competitors, McDonald's, has had -- apparently having some success with sweet tea and, of course, we've sold sweet tea at Hardee's for years and years. So it's kind of already built in. But we're working with our partners at Coca-Cola on our beverage variety which I think needs to be improved and which we are improving and on the quality of the beverages we sell. So we're moving forward on that.

BRIAN MOORE: Great. Thanks so much. Congratulations.

OPERATOR: Keith Siegner, Credit Suisse.

KEITH SIEGNER, ANALYST, CREDIT SUISSE: Thank you. First, with the debt reduction this quarter, with EBITDA up, with margins seemingly on the right track, leverage ratios are very manageable here -- can you just remind us of how we should prioritize or think about prioritizing allocation of excess capital between debt reduction, share buy back dividends, especially with this more conservative CapEx plan?

ANDY PUZDER: Keith, you know what our dividend is. And obviously if we were going to make a change in that it would be something the Board would do. So we would announce it and we have not announced and change to the dividend. So you know what that's going to be. We've told you this morning what we believe our capital expenditures will be, that $120 million to $135 million number. And to the extent we have borrowings on our revolver I would use excess cash to reduce our revolver debt. Now our term loan debt we have an extremely favorable rate on and it would be -- I'm not sure what the circumstances would be that would encourage me to reduce our term loan debt which we've got for about another three and a half years, because I won't be able to borrow money again at this rate. So I'm not sure what we would do once we had the revolver paid down. I doubt very seriously I would be paying down the term loan. But circumstances could change and make that a possibility. I don't know if that helps you or if, Ted, you want to add anything to that?

TED ABAJIAN: No, I think you covered it. The CapEx range is $120 million to $130 million for this year.

KEITH SIEGNER: No, that definitely helps. In terms of the CapEx plan and some of the factors that you talked about that led to the reductions, is there anything that could change or would change that would enable you to maybe reaccelerate that unit growth at this time or is that not necessarily foreseeable without some major changes in the macro for example?

ANDY PUZDER: We've had some very good results with our recent Hardee's new units and you can see from what Ted showed you this morning the impact on EBITDA and cash flow of these new units and how beneficial they are to the system. So if the returns on the Hardee's units improve to the point where we think it's something we want to pursue more aggressively, it probably takes you about a year, year and a half just to get more sites in the pipeline, but that's something we certainly could accelerate. On remodels, we reduced the number. I think we probably were overly aggressive. We've done the -- not this time but the prior time when we told you how many we thought we would do it. I guess we've done the ones in California where the permitting was easy. And so now they're trying to deal with the ones where the permitting is difficult. And so that's slowed us down somewhat. I'm not sure how we could accelerate that unless California decides not to be a socialist state anymore and we can (technical difficulty) entrepreneurially. In the Midwest and Southeast we could probably do Hardee's remodels. I guess we have the potential to accelerate that. But we were really stalled this spring, or late winter and early spring, we were really stalled by weather conditions which really made it impossible to go forward with remodels in a lot of the areas we would have liked to have been remodeling. And so I think the current number we're showing you is probably a more realistic number and a more realistic average over time because some years you have good weather, some years you have bad weather. So I guess new remodels -- new units at Hardee's is an area where we could increase if we decided that we had the money and it was the kind of investment that we would -- the most desirable investment or the most desirable use of funds we could make we could increase there.

KEITH SIEGNER: Okay. One other question on a different topic. I was definitely impressed with the franchise margin this quarter. And I was just wondering if you could help kind of walk through the opportunity here, say longer-term as we think about leveraging administrative costs, but also the volatility that we've seen in the distribution line. What's really the opportunity or how should we think about that for the franchise margins?

TED ABAJIAN: A couple things there, Keith. First of all, this quarter I think that what you're seeing in terms of that "distribution margin" is really, number one, as refranchising activities continue that does have an impact in terms of the -- in the quarter we sell restaurants we record franchise fees associated with those restaurants. In this quarter there is about $1.5 million of franchise fees within franchise revenue, so that dramatically improves that margin calculation you are referring to. The other side is related to distribution, and if you recall last year in the first quarter, we were right in the middle of our relocation of the distribution center and installation of the whole new distribution management system, which cost us in terms of operating efficiencies. So we've regained those operating efficiencies this year. So on a year-over-year basis, you do see that level of improvement. I think going forward, clearly as we continue refranchising or as we roll over last year's refranchising, you do have this shift in revenues in terms of shift to royalty based revenues in the case of the refranchised stores versus the company operated revenues. The one another wildcard is looking back at last year to determine the amount of franchise fees that we received last year when we did the bulk of the refranchising, and I think the bulk of that occurred in the third and fourth quarters last year. KEITH SIEGNER: Okay. I will let somebody else go. Thanks. OPERATOR: Chris O'Cull, SunTrust. CHRIS O'CULL, ANALYST, SUNTRUST: My first question relates just to the Hardee's development. Andy, it seems like a lot of the development -- well, the development strategy at Hardee's has been around opening a few incremental locations in just various markets. I was wondering if you can really tell whether Hardee's units are generating strong returns without being more aggressive maybe with like a market penetration strategy. ANDY PUZDER: You know, a market penetration strategy would certainly produce better results, but what we'd like to see is we'd like to see the units that we are -- and part of this has been a learning process for us. Obviously, Hardee's has changed significantly from when we took it over with menu and who we market to and how the brand is regarded, not only with respect to quality but the age group of our customer and our target. So what we really needed to find out, and we have been doing this in various markets, is are we still primarily a breakfast brand; are we a brand that goes in high-income areas or lower-income areas? Are we an urban brand or a rural brand, or are we all of those brands? So we have been putting restaurants in different locations, some of which perform exceptionally well. We put one in downtown St. Louis near Busch Stadium, and it is near our corporate headquarters and it is in an old Wendy's location, and sales have been very, very impressive. We just opened one in Atlanta that has been very impressive to date. So we are trying to get some indication as where we could build and where we should build. And when we get -- I think some of the problems have been -- you really need -- this is a brand that hadn't built restaurants in a long time. So you really didn't have operators that were accustomed to dealing with new restaurant openings, where you might have a really huge dinner business, for example, and all of your operators that have been in traditional Hardee's were used to a very small dinner business. And maybe you didn't staff it correctly and then people didn't come back because you didn't have business the way it was supposed to be at dinner. So we have actually taken one of our operators, a woman who has just done a great job for us, and we have put her in charge of new unit openings. And when we get a few more under our belt, it easily could be the case that we're going to get the kinds of returns that we need to get to justify going into a market and seeing that if we do a market penetration approach, we're going to be better off. Because if you go -- some of these markets, particularly in the Midwest and Southeast, to go from a C advertiser to a B advertiser, you may only need five or ten units. Or go from a B to an A, you might only need five or ten units, and that can make a huge difference in your average unit volumes for the whole market, which improves profitability across the market. So your question is a good one, and it is one that our real estate and development people are on top of and that we're watching very closely. CHRIS O'CULL: The reason for my question is because I am in Nashville, as you know, and it just seems like this market is right for a Hardee's development, and it would really improve top-of-mind awareness for the brand. ANDY PUZDER: Yes, that is a market where we have a lot of development opportunity and an exceptionally good operator. That is one of the markets we are looking at closely. That could be a great -- you're absolutely right, Chris, that could be a great market for us. CHRIS O'CULL: How far away do you think you are from trying this kind of market penetration approach? ANDY PUZDER: First of all, we may build some -- we are looking at Nashville as one of the areas where we would build. So you will probably be seeing some new units in the next couple of years, but I would say before we made a -- we're probably a year away maybe from making a decision as to try and penetrate a market heavily and see if that benefits the brand. CHRIS O'CULL: Ted, just in terms of the boneless beef question, are you exposed to price fluctuations on the 50's and the 90's? TED ABAJIAN: We are. Again, on the domestic beef that we have purchased, which is all of our Angus products, we are essentially on the spot market there. We do import some beef as well, which is a more stable pricing. Although with the dollar deterioration that pricing advantage have been deteriorating over time. But as we've always been, we're essentially on the spot market on our beef products. CHRIS O'CULL: Okay. And then Ted, I think on the last call John Dunion mentioned that the Company had favorable coverage on wheat through July. Have you been able to enter into new contracts for wheat? ANDY PUZDER: I believe we have some partial coverage through September in addition to the coverage you mentioned for July. So we do have some additional coverage, but it's not 100%. CHRIS O'CULL: Okay. Are the biggest exposures right now boneless beef and maybe wheat and dairy? ANDY PUZDER: Yes, I mean the same that have always been there. And of those really the one that hasn't been much of an issue but that is becoming an issue is beef. And so, given the magnitude of the impact of beef on our overall food costs, that's an area we watch very carefully. CHRIS O'CULL: Soft drink syrup, we're not seeing any kind of changes this fiscal year in pricing there? ANDY PUZDER: No, we have a contract in place and that's -- actually on a net basis when you include the overall allowances we're afforded by our contract we're actually slightly favorable in that area. CHRIS O'CULL: Great. Thanks, guys. OPERATOR: Tony Brenner, Roth Capital Partners. TONY BRENNER, ANALYST, ROTH CAPITAL PARTNERS: Two questions. First of all, are you done for the time being with your share repurchase program? ANDY PUZDER: Yes, we'll be opportunistic. I can't tell you that if some great opportunity came up we wouldn't take advantage of it, but we're not doing anything at the moment. TONY BRENNER: And my second question has to do with your ability to pass along prices as you implied you would you earlier in the call. Just looking at the Carl's data in your Q, it appears, given that comps were up 3.9, transactions were up 1.9, and pricing is up something more than 4%, it appears that, at least for Carl's which is largely California, there's been some trading down by your customers. And I'm wondering with almost a $7 average ticket, which is bordering on the fast casual category, whether you're seeing any kind of negative reaction or anticipating any. And do you really believe that the fact that you have a superior burger allows you to just fully pass on all the cost increases that you may incur? ANDY PUZDER: I think first of all everybody has got to pass on the cost increases. I think that even the brands that are basically franchisor brands and are now doing everything they can to drive the top line to ignoring some of the franchisees' concerns. Eventually they're going to have to pay attention to those concerns because if the franchisees don't stay in business the franchisor doesn't stay in business. So I think everybody is going to have to improve on pricing. Transactions I think are misleading. Please keep in mind that they are not customer counts, they're influenced by how much drive-through business you have -- a lot of things go into what transactions mean. I think for Q1 what you're seeing at Carl's is, with respect to any indications that there's trade down, is people getting Chili Cheese Fries, because Chili Cheese Fries, we're finding, are not just something you get with your burger, there are people that actually came in and got them as kind of snack items. So Chili Cheese Rise were a big help to us in Q1. They're the kind of thing that drives transactions and may even lower your average check. Although again, I don't think that's particularly meaningful. But I think that may have had a big impact on what happened in Q1. TONY BRENNER: You indicated that the Chili Cheese Burgers are now a permanent part of the menu, are the fries also? ANDY PUZDER: Yes, and will be -- yes they are, absolutely. TONY BRENNER: Thank you. OPERATOR: Steven Rees, JPMorgan. STEVEN REES, ANALYST, JPMORGAN: My question is on the Hardee's margin performance in the quarter, still down 110 basis points. And I guess I was thinking that there might be more of a positive impact from the refranchising. I thought the units that you refranchised were lower margins. Was that correct or is there any way to quantify how much that impacted the margins? TED ABAJIAN: Stephen, there is some favorable impact there, but I think unfortunately what we're seeing is more than offsetting that is just the overall increase in mostly wheat and dairy which continue to be a big issue. And if you think back, last year in the first quarter we didn't have wheat or dairy issues whatsoever. So while I probably have buried somewhere a chart that would help me quantify that, I think ultimately the food cost headwind is really the much bigger impact. And we're dealing with that through pricing. STEVEN REES: Okay, and then how are you thinking about the longer term margin potential at Hardee's? Is it still -- do you see structural opportunity there or is it really just a question of waiting for the volumes to improve to narrow that gap between Hardee's and Carl's? ANDY PUZDER: I think the volumes are -- we're at $963,000, we're looking to be at $1 million within a reasonable period of time. So the volumes are going up and we own a bunch of the real estate. So occupancy, once we're through the remodel phase, occupancy shouldn't be -- should be a real benefit to us. And then when commodities either begin to hold firm or come down I think you're going to see dynamic margin improvement. And I've actually heard that wheat may be coming down, that we have a very abundant wheat crop, maybe the second-biggest wheat crop ever coming to harvest this year. So wheat may be coming down as well which will be very helpful to Hardee's. So if you look at the EBITDA bridge that we did for the shareholders meeting for Q1 and then the one that Ted just -- that just updated here today, you really can see the impact of these commodity cost increases, and conversely you should be able to see the impact of commodity costs leveling and our pricing catching up or commodity costs beginning to decline. And I think that will be very meaningful for both brands. STEVEN REES: Okay. And then just on the refranchising, Andy, you mentioned that you're going to do another 40, but it may be 33 for Hardee's. Does it stop here? Are you at the right mix because I think you're still a little bit above the QSR average? Or do you see further opportunity? ANDY PUZDER: I don't think there's a right percentage. I think that when commodities are good and labor costs are good you want to own as many as you can and when they're not you want to be a franchisor as much as you can. I think the real key is how many restaurants can you effectively and efficiently run and are you in markets that you will grow. And I think that once we get rid of these last 33 restaurants and, again, there are seven that are on the bubble, but in that range -- once we do that I think we're in the markets we need to be in and with the right amount of restaurants. That doesn't mean that if opportunities present themselves we may not refranchise additional restaurants, but I would say that we're pretty much through what we think we need to do, at least in the short-term or the medium-term. STEVEN REES: Okay. And then just finally, on the CapEx plan for this year, the $120 million to $130 million, how much of that is nondiscretionary? And then what percentage of the $354 million three-year plan is nondiscretionary as well? TED ABAJIAN: I don't have those numbers calculated out, but if you want to, give me a call certainly. STEVEN REES: Okay. All right, great. Thank you. ANDY PUZDER: It will probably be in the next presentation, too. STEVEN REES: Okay, perfect. OPERATOR: (OPERATOR INSTRUCTIONS). Rachael Rothman, Merrill Lynch. RACHAEL ROTHMAN, ANALYST, MERRILL LYNCH: Could you give a quick follow-up on the Hardee's margin? Can you help us think about as we move through the year and you cycle the refranchising? And then wheat costs obviously have been coming down, but minimum wage going up, should we think about margin improving or deteriorating? Or how should we think about the sequential progression as we move through the second quarter and into the back half of the year? ANDY PUZDER: The wheat is a help and ground beef is going to hurt us a little bit, but it's not going to hurt as much at Hardee's as it would at Carl's. And then we're going to take more pricing, so we know we're coming up against the minimum wage issue so we've been planning that pricing for a while and we've actually increased the pricing we're going to take somewhat because of the increase in beef. So it depends -- really Rachael, it just depends upon how much beef goes up and what happens with the other commodities. I wish I could give you more guidance, but I don't know anymore. I mean Ted, have you got any better guidance than that? TED ABAJIAN: Of course our goal is to continue to narrow that gap, as has been the case for the last three quarters. So that's certainly our objective. ANDY PUZDER: It's a big focus. That and keeping G&A under control and reducing it are really the two big strategic initiatives within the Company; they're the thing that we talk about the most and work the hardest on. So we're all over the pricing issue. RACHAEL ROTHMAN: And then in the updated reconciliation slide of the adjusted EBITDA numbers, the G&A figure that you site says that it excludes G&A savings associated with the refranchising. Do you guys have an estimate of how much G&A you've saved from the refranchising either in the quarter or over the last 12 months and how we should think about that opportunity going forward as you cycle over the 200 units? ANDY PUZDER: I think it says it includes those cost reductions, is that what you just said? RACHAEL ROTHMAN: I thought it said it's excludes it. TED ABAJIAN: What it is -- in calculating the net impact of the refranchising I include in that line any G&A reductions that occurred as a result of refranchising. And it's not countered in both places, obviously. ANDY PUZDER: It's just in a different place, right. TED ABAJIAN: Yes, it's in a different place. But as we get into Q2 and Q3, mostly Q3 is when the majority of the refranchising occurred last year, we'll start to roll over -- because we make those cuts immediately when the stores are sold. So other than the quantification we gave late last year which was $22,000 to $24,000 per store reduction that we make, I still feel good about that estimate. RACHAEL ROTHMAN: But it is immediate. So if you cut the stores in the third quarter it would come out in the third quarter? TED ABAJIAN: Yes, just depending on when it occurs during the quarter. RACHAEL ROTHMAN: Correct. Perfect. Thank you so much. TED ABAJIAN: Thanks, Rachael. OPERATOR: At this time I'd like to turn the call over to Mr. Andrew Puzder for final remarks. ANDY PUZDER: Thanks, everybody. It was great reporting the quarter. We're very proud of what we did and we were happy to tell you about it and we look forward to coming back at the end of second quarter. Thanks very much and God bless you all. OPERATOR: Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day. [Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. 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